California Worker Status Rule Gives Employers Cause for Concern

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Are you an employee, and do you get all the benefits that come with it? Many California businesses wonder what the answer might now be for their workforce. And many may not like the answer under a new test recently adopted by the state Supreme Court.

“Any employer using independent contractors or what they’re deeming independent contractors should be concerned,” worker-side attorney David Borgen told Bloomberg. “They should carefully review the decision and their options to see what they’re going forward.” Borgen is of counsel at Goldstein, Borgen, Dardarian & Ho in Oakland, Calif., and a contributor to a Bloomberg Law treatise on federal wage-and-hour law.

Gig economy companies that offer app-based services may have the most to worry about, but they aren’t the only businesses that rely on a workforce they consider contractors.

“There are a number of industries where the relationship between a worker and a company traditionally has been an independent contractor,” Sean Kingston, who represents management as an associate in Fisher & Phillips’ Irvine, Calif. office.

One example Kingston cited as a typical contractor relationship is a company that hires a plumber to repair a plumbing issue and the work is performed in a typical office setting. The plumber who comes to the office building on a one-off or sporadic basis to complete a discreet project is more likely to be considered an independent contractor, he said.

FedEx Previously Adjusted Policy

Delivery giant FedEx Corp., which has settled misclassification claims for hundreds of millions of dollars in recent years, doesn’t plan to change its operations after the state Supreme Court’s April decision involving delivery service company Dynamex Operations West Inc. FedEx said in a statement that it works with companies that classify workers as employees.

“The California Supreme Court decision in Dynamex relates to the legal test by which an individual’s employment classification should be determined in California,” the company told Bloomberg Law by e-mail. “Since 2011, FedEx Ground has contracted only with independent companies—not individuals—that agree to classify and treat their staff as employees under applicable laws.”

The settlements are based on the company’s alleged practices that occurred before its 2011 policy shift.

Dynamex, the company at the center of the court’s ruling, changed its business model with respect to driver classification years ago, Rick Leckner, a spokesman for parent company TFI International Inc., told Bloomberg.

“This all happened before TFI acquired Dynamex,” said Leckner, who couldn’t elaborate on the change “because it differs from state to state.”

Dynamex’s acquisition by TFI closed in 2011, according to Bloomberg. The lawsuit against Dynamex dates to April 2005.

Three-Factor ABC Test

In the Dynamex case, drivers said they weren’t getting employee-level benefits such as wages and business expense reimbursement because they were wrongly classified as independent contractors. The California Supreme Court on April 30 adopted a test that presumes employee status and sent the case back to a lower court to apply the new standard.

Employees are supposed to receive benefits and guarantees that aren’t required for independent contractors, such as minimum wage, overtime for working more than 40 hours in a week, unemployment insurance and protection from discrimination.

California also requires overtime when an employee works more than eight hours in one day and reimbursement for an employee’s business expenses.

The state Supreme Court adopted a variation of a test known as an “ABC test” that has been in use in other states for a variety of workplace law purposes, such as unemployment insurance and workers’ compensation. In California’s version of the test, a company that wants to demonstrate independent contractor status must show (A) the worker has freedom from control over how to perform the service, (B) the service is outside the business’ normal variety, and (C) the worker is engaged in an independently established role.

If a company can’t satisfy all three prongs, the worker is an employee.

Gig Companies May Focus on Prong B

Prong B is the element that companies may find the most likely target for attack, especially those that are tied to smartphone apps, Robert Cooper, a co-chair of the management law firm Buchalter’s labor and employment practice, told Bloomberg. Cooper is a shareholder in its Los Angeles office.

“Prong B is going to be tested by the gig economy because that is the test,” he said. “That’s the real linchpin. You have to be in a different business than the business you are working with or for to be considered an independent contractor.”

“As a general rule, most of the entities have a couple of big similarities, which is they consider themselves a software platform,” he said. A company could repel a part B attack by arguing it provides software-based matchmaking services to connect a consumer with a contractor, he said.

Many industries in which companies classify workers as independent contractors will be affected, Rebecca Smith, director of workforce structures for worker advocacy organization National Employment Law Project, told Bloomberg.

Smith disagreed that companies relying on apps to connect customers to a service are all in the matchmaking game.

“I don’t think that there’s very much dispute that the business of transportation network companies is transportation or that the business of delivery companies is deliveries,” she said.

“Transportation network company” is a term frequently used for ride-hailing companies such as Uber Technologies Inc. and Lyft Inc.

Labor Dept. Report Coming Soon

How California’s ABC test will affect businesses that rely on independent contractors is hard to predict, in part because up-to-date data about the contract workforce is hard to find.

The Labor Department might shed light on the situation next month with the June 7 scheduled release of a report on contingent and alternative work arrangements. The report is based on a 2017 data collection.

The survey reports on independent contractors as well as on-call workers, workers hired by a temporary help agency or by a contract staffing company, and others who don’t expect their jobs to last.

The most recent time the Bureau of Labor Statistics conducted the survey was 2005.